The cold war I am referring to is the one brewing between the US and China. From the American side it is tooted as the competition for economic (and not only) supremacy in the 21st century. From the title, you can guess that I am not in favor of waging this war. It will be damaging to the world and it may not produce the results American policy makers expect.
The US won the previous cold war with the Soviet Union because, while maintaining military parity, the US enjoyed an unrivaled economic superiority. China though is a whole different opponent. China’s leaders have successfully combined Communist Party rule with the power of the markets to lift China out of poverty and turn it to an economic superpower. Economic heft has also allowed China to raise its international profile and make up for past humiliations in the hands of foreign powers. Achieving and maintaining economic well-being and significant presence in world affairs are the two-fold objectives of China’s nationalist policy.
But China wants to go beyond these legitimate goals. It is China’s new ambitions that have sounded alarms in the US. The Belt and Road Initiative (also known as One Belt, One Road) was announced in 2013. It aims at investing economically, culturally and educationally in a long list of countries and connect China to the world economy as the Silk Road connected China to Europe in the late Middle Ages. This initiative has already given China a non-trivial presence in the global supply chain of raw materials and transport. Two years later in 2015, China announced the Made in China initiative that aims at making China self-sufficient in all critical high technologies and a leader in Artificial Intelligence by 2025. It is exactly the potential of losing not only superiority but also independence in cybertechnology (including AI) that defines the new cold war from an American standpoint.
So, how has America done in the years that China was turbocharging its economic growth following its admission to the WTO in 2001? Not very well. This twenty-year period exposed America to the risks of its capitalist model and its unsettled racial, social and political divisions. The list is sobering: Corporate scandals spearheaded by Enron and WorldCom; collapse of the housing market and near-failure of the financial system; intense polarization leading to the Trump presidency and the questioning of democratic institutions, including the integrity of elections.
The fall-out has been dramatic and consequential. It includes the deindustrialization of the Rust Belt, the loss of well-paying manufacturing jobs, the decline of towns and communities, the “deaths of despair” from opioids, the squeezing of the middle class, and the exacerbation of income and wealth inequities. The pandemic provided further evidence of the devastating consequences of unequal health care and job security in America.
Even before the 1990s, it was America that from a position of strength had evangelized a liberal international economic order to the world. We now realize that this policy was not well-thought out. The paradigm of achieving aggregate GDP growth and then expecting firms and workers to adjust to the evolving realities proved to be overrated. Big firms were able to move abroad to exploit reservoirs of cheap labor but their laid off workers were left without support for retooling and reentering new jobs that paid as well as those lost. The low unemployment rates of recent years fail to reveal the paucity of good jobs for blue-color workers.
Workers were not the only piece of the economy affected by globalization. The productive side of the country was also affected by the new geography of manufacturing sectors. In a globalized market, each firm is interested in securing its production factors from the lowest-cost producers. Minding the national or the geopolitical interests of the home country is not necessarily high in firm strategy. A free global market is non-threatening as long as there are no nationalist agendas. US administrations and politicians now realize that China’s nationalist economic agenda threatens the American national interests. The mistrust is fueled by fears that China may use its cybertechnology industries to acquire access to information and manipulated it in order to further the interests of its centralize communist political system. Such capabilities can become even more worrisome if coupled with mastery of Artificial Intelligence.
Thus, to counter China’s inroads into these high-tech sectors, American policy makers are coming around to two important compromises. They are retreating from their internationalism and are embracing what has sounded like an anathema, that is, industrial policy. Both compromises though pose serious challenges. Adopting an industrial policy carries the risk of institutionalizing crony capitalism by extending political favoritism to well-connected firms. To ensure that an industrial policy serves legitimate national interests requires that the American political system accepts and learns to run joint projects between the state and the private sector. Given the inordinate influence money can buy in America, adopting an industrial policy that truly serves the national interest may prove to be too high a mountain to scale.
Forcing American firms to repatriate their operations will put pressure on them to contain the higher labor costs either through robotic technology or by suppressing wages or workers’ rights, like the right to form unions. If so, the scarcity of good jobs for blue-color workers is likely to persist. With the prospect of sanctions and counter-sanctions much is also at stake for the global American businesses in social media and banking, which will, therefore, be unwilling to countenance to a retreat from lucrative foreign markets. That’s an additional challenge to policy makers in government and Congress.
Even if the American retreat from globalization comes to pass it is unlikely it will hinder China’s economic advancement. In the next several decades, population growth in regions, like Africa, will be much higher than in the developed world. And PriceWaterhouseCooper forecasts that between now and 2050 emerging economies will grow at twice the rate of developed economies. These trends present China ample opportunities to grow without full commercial ties to America or Europe. And it is doubtful to what extent Europe will damage its own interests in the huge Chinese market out of solidarity with the US.
For all the above arguments America’s best approach may be one of competition with proper respect for vital national interests without resorting to fruitless and damaging antagonism. The remarkable story of America and China is that two superpowers have established a rare interdependence built on the common ground of commerce. It is in their mutual benefit to work out their national interests without sliding into a damaging cold war.
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